Economic growth across the Asia and Pacific was stronger than expected this year, but new risks — such as rising protectionist sentiment — and old problems — burdensome debt loads, among others — could upend the expansion, a report from the International Monetary Fund said.
China, Japan, Korea and the Association of Southeast Asian Nations contributed to regional economic growth that's expected to be 5.6% in 2017 and 5.5% in 2018, the international organization said in its economic outlook for the region released in Washington, D.C., on Oct. 13. That expansive forecast offset a weaker outlook in Australia and India. The growth figures represent 0.1 percentage point improvements over the IMF's April estimates.
Yet geopolitical tensions, like the war of words between the U.S. and North Korea, sudden capital outflows, protectionism and uncertain government policies posed significant risks to continued growth, the IMF said. Though tightening in U.S. monetary policy is expected to be gradual, the pick-up in rates could work to the detriment of indebted governments in the region.
"The region is currently in a favorable position, but how long this will last is uncertain," the report cautions. "Near-term risks to the regional outlook are broadly balanced, but medium-term risks are skewed to the downside."
"Asia remains an engine of growth," for global GDP, and especially China and India, said Changyong Rhee, the director of IMF's Asia and Pacific Department in a news conference following the report's release. The main issue now, he said, is how the region will remain resilient in the face of economic shocks, he said.
China, in particular, presents reasons for concern, along with some long-standing maladies. "Key downside risks include geopolitical tensions, sudden capital outflows, a shift toward inward-looking policies, policy uncertainty and a sharp adjustment in China." the IMF suggests. "In addition, the region continues to face serious longer-term challenges including population aging and lagging productivity."
"Asia could become old before it becomes rich," Rhee said.
In China, where growth accelerated to 6.9% in the first half of the year, a gradual removal of accommodative monetary policy would help keep credit expansion in check, especially if core inflation picks up. The IMF expects China's 2017 consumer prices to be up 1.8% year-over-year and 2.4% higher in 2018.
However, the government's recent moves toward financial tightening could result in a bigger-than-expected impact on the economy. Mistimed government actions could cause resurgent capital outflows and exchange rate pressures, the report said.
And with the U.S. moving toward greater protectionism, China's growth — mostly driven by a pickup in exports — could be endangered.
China's "overly ambitious" growth objectives and mounting debt and financial imbalances continue to cause concerns. "Should a sharp adjustment occur, domestic demand would take a hit, which in turn would roil global financial markets, lower commodity prices, and reduce global and regional growth," the report warned.
Household debt is on the rise, and not only in China, Rhee said, raising additional concerns about future drags on growth.
"Public sector debt remains stable, but private debt – corporate, household – is increasing," he noted.
Regional trade gains
Exports have made an impressive recovery so far this year, the IMF reported. After sharp declines in 2015 and the start of 2016, Asian exports swung upward this year. Traditional Asian exports including electronic products, machinery and transportation equipment were the underlying drivers.
Export gains in the Asia-Pacific region were broad-based and not concentrated in a few countries, the IMF said. More noteworthy was that much of the increase came from intra-Asian trade, as regional emerging markets drove demand.
In China, imports from major Asian countries increased to 12% of all imports in mid-2016 from 9% in mid-2015. India's imports from its fellow Asian countries to 30% from 27% during the same time period.
A recovery in global commodity prices helped fuel demand for Asian commodities exports, the IMF said. And technology inventories that had piled up during the recession have finally been drawn down as companies restock semiconductors and mobile tech components, activity that is further fueling demand.
However, the IMF warned that the tech inventory cycle could lose steam, compounded by a rise in trade barriers and geopolitical risks. In addition, the same kind of commodity price growth may not happen next year, given the baseline effect of large losses for those exporters during 2015 to 2016.
Updated to include remarks from IMF Asia and Pacific Regional Economic Outlook Update news conference.